Why Trade Is Good (Both Exports And Imports)

WHY TRADE IS GOOD (BOTH EXPORTS AND IMPORTS)

GDP is given by the basic equation:

Y = C + I + G + X - M

or Y = C + I + G + NX

where NX = X - M

These equations *seem* to say that GDP consists of net exports (or trade surplus) and hence:

1. Exports are good

2. Imports are bad

3. Trade surplus is good

4. Trade deficit is bad

1 is correct and 3 is partially correct. But 2 and 4 are fallacies. They are bad in themselves; what is worse is they make people miss an important economic variable: total trade (ie, exports + imports). Research has conclusively proved that total trade has a strong positive impact on economic growth.

Believing fallacies 2 and 4 leads to a zero-sum-game mindset. But trade is not a zero-sum-game. Trade (exports + imports) gives us:

a) A bigger market for our exports

b) Cheap and good-quality products

c) Specialisation and efficiency

d) Knowledge and technology

So we must avoid fallacies 2 and 4 (which are due to a wrong understanding of the GDP equation) and instead look at total trade (exports + imports):

T = X + M